David B. Grusky shares an insight generally ignored by the center-left: The real problem of inequality is not inequality of after-tax income resulting from an inequitable tax system, but the inequality of pre-tax income generated by the economic system itself (“What to Do About Inequality?”Boston Review, March-April 2012).

Income inequality results, not — as in the standard liberal narrative — from a highly competitive market, but from “lack of market competition.” “The core idea is that powerful players have built self-serving and inequality-generating institutions that are often codified in law and come to be represented — through an ingenious sleight of hand — as laissez-faire capitalism.” There would be less income inequality, Grusky writes, if the economy were more competitive.

He proposes, in place of liberal framing of progressive taxation compensating for inequality generated by “laissez-faire,” a narrative of “an economy rife with rent.”

For example, he cites the explosion in CEO pay coupled with stagnating income for production workers — a problem caused by a cartelized economy dominated by a few hundred oligopoly corporations, in which inside directors set executive compensation based on the practices of “peer firms.”

If there’s a fault in Grusky’s analysis, it’s that he fails to stress sufficiently the state’s role in creating these rents. He’s probably a bit unclear on this himself, since the term “market failure” appears more than once in his argument. Nevertheless, in a climate where people like Thomas Frank regularly throw around terms like “free market” and “laissez-faire” with a straight face, it’s encouraging to see a liberal like Grusky go so far in the direction of theoretical clarity.

The real obfuscation comes from Shikha Dalmia, writing for Reason magazine — a publication with “Free Minds and Free Markets” in its subtitle. Dalmia, attempting to defend the virtue of the alleged “free market,” instead defends the track record of actually existing corporate capitalism, undoing much of the clarity achieved by Grusky (“Forget About Income Inequality,” March 30, 2012).

For Dalmia, the problem is Grusky’s “indictment of capitalism”: First, that he raises the question of whether the corporate capitalist system is at least a rough proxy for a “free market” (“our free enterprise system,” as Mitt calls it). And second, that — even if he felt it was absolutely necessary to raise such an uncouth question — he suggests the system might actually deviate from free market principles to the advantage of plutocrats and cowboy CEOs.

Dalmia’s response is to defend the existing system as if it were a free market, or as close to one as makes no nevermind. Although she concedes that some rents from market distortions exist, they’ve been insufficient, she claims, to prevent the almost-free-enterprise system from raising the lower classes’ well-being.

The mushrooming wealth of the super-rich, she asserts, has nothing to do with the standard of living of the 99%: The gap between the material quality of life of the average person and that of Bill Gates is, thanks to technological progress, smaller than ever before. This praise, although true enough, is faint indeed. The income of people like Gates comes from enclosing technological progress as a source of rents, through artificial scarcities and artificial property rights like copyright. If productivity rises faster than they can extract rents from it, it’s not for lack of trying.

There’s “no evidence,” Dalmia asserts, that the wealth of people like Gates results from making the poor poorer. No evidence! How about simple math? The reason a CD of Windows or Office costs $200 rather than $10 is entirely because of copyright — a state-enforced monopoly. That’s $190 in rent that goes from your pocket straight into Bill Gates’s.

As Benjamin Tucker said, the fundamental principle of privilege is that “one man’s deficit is another man’s efficit.” Or in Big Bill Haywood’s more colorful language, “for every man who got a dollar he didn’t work for, there’s another man who worked for a dollar he didn’t get.” That same principle applies to most of the profits in the transnational economy. The dominant sectors — biotech, software, entertainment, electronics, pharma — have business models based entirely on “intellectual property.” Electronics and agribusiness are heavily subsidized. And agribusiness and extractive industries like logging and mining are generally dependent on privileged access to land expropriated from native populations over the past two or three centuries.

Further, Dalmia’s argument proves too much. Government taxation hasn’t managed to prevent an increased standard of living, either. Does she suggest we “forget about” robbery by the IRS?

As Grusky says, the rent-riddled corporate economy is frequently defended, by a process of idelogical legerdemain, as the “free market.” There’s a big difference between “pro-market” and “pro-business.” We shouldn’t lose sight of it.

4 comments

Great article, Kevin! Here's a repost of the comment I made on Dalmia's Reason article:

Dalmia is right on when criticizing the dubious goal of income equality, but seriously misunderstands Grusky when she claims he made an “indictment of capitalism.” Grusky clearly indicted *economic fascism* not laissez faire capitalism. Put another way: he condemned statist capitalism, not libertarian capitalism. Grusky writes, “The core idea is that powerful players have built self-serving and inequality-generating institutions that are often codified in law and come to be represented—through an ingenious sleight of hand—as laissez-faire capitalism.” Ironically, the statist Grusky understands better than the libertarian analyst the difference between the two! Dalmia is falling for what Roderick Long calls “right conflationism” and Kevin Carson calls “vulgar libertarianism” – mistaking the statist quo for laissez faire capitalism. As we know, it is far from that! Using Bill Gates as an example, Dalmia overlooks the massive subsidy gets due to the State giving him a special privilege – the government imposed monopoly called “intellectual property.” For a good critique of this article, read ““Forget About It?” Not On Your Life!” by Kevin Carson here: http://c4ss.org/content/10041

If there’s a fault in Grusky’s analysis, it’s that he fails to stress sufficiently the state’s role in creating these rents. He’s probably a bit unclear on this himself, since the term “market failure” appears more than once in his argument.

To be fair, there is a market failure in the labour market, produced by the external or spillover costs of having the poor around that doesn’t show up in the costs faced by individual employers when they make decisions about hiring and firing. With Elizabethan Poor Law or Bismarckian Welfare State systems to address this, those people get supported but the cost of funding all that is still spread, and without such systems you get spread “Vagrancy Costs” which show up in higher levels of crime of necessity or the additional policing needed to cope with that (which is why the Elizabethan and Bismarckian systems were brought in in the first place). Either way there is a labour market failure.

Of course, the problem would go away if people had access to enough of their own resources to be self sufficient or only to need a market clearing top up wage they could all price themselves into and still survive on (eventually, after a time lag – so a Distributist sort of fix that gave them such resources would also need faster acting measures to bridge the transition like the Negative Payroll Tax approach I have mentioned here before). As things are now, in developed countries, wages low enough to price everyone into work without leaving any unemployed over are too low for survival for everybody without additional resources (so much for the reasoning you see from certain contributors to Lew Rockwell’s site claiming that everybody could price themselves into work if only they were willing and allowed to settle for less, accurate as far as it goes but which stops at that without bringing out the fact that under current circumstances some would still perish if they did).

So both things are true: governments, states, powerful magnates, et al all contributed to creating the situation by taking away independent resources, which is what rent seeking is (you can see this throughout history, not only recently but also in the Highland Clearances, in both phases of the English Enclosures of the Commons, in the late Roman Republic, and so on); and also that worked through to create a defective labour market in which the proximate cause of trouble was market failure.

The Grusky article you linked to was fantastic! Unfortunately, a quick glance at the 'comments' section dashed my hopes of Leftists coming to terms with the equality that market competition creates anytime soon.

Very nice commentary, Kevin. I agree with most of what you say, though I might disagree with you on the extent of the distortion in the current system. For example, I think that in a real free market we would see very high CEO pay (say) and large gaps between CEO and average worker salaries (and yes, I think we would still have employment, workers, and firms in a free market). I also don't think being pro-business, properly understood, need be contrary to being pro-market.